eBusiness Weekly
The price of gold has continued its rocket-shot of a week as the world’s financial markets are reeling; breaking to a six-year high above the major psychological line of $1 500 an ounce this morning.
At the time of writing, gold trades slightly above that level in the sport markets, having ticked just below $1 510/oz at times this morning. As the chart appears to be settling from its morning breakout, let’s take a look at what drove the yellow metal to this point. By understanding what inputs have driven gold prices so high, we can better gauge how likely they are to continue their uptrend from here.
From my point of view, the fervent uptick in gold-buying over the last week is driven by four very familiar factors: the state of trade conflict between Washington and Beijing, tumbling stock markets around the globe, cut-happy central banks, and the collapsing of treasury yields.
US-China Trade War
The re-enflamed trade conflict between the US and China, the world’s two largest economies, is both the biggest influence on this week’s market convulsions and also the factor that is mostly independent of the others. For this reason, it bears the closest watching.
The trouble is, as we’ve often discussed, it’s also the most unpredictable part of the current macroeconomic landscape, as Thursday afternoon’s fireworks demonstrated. This week’s instability began right away when, already roiled last week by the sudden announcement of more US tariffs on Chinese goods, the markets showed signs of panic as the Chinese Yuan was allowed to depreciate by the most in a decade and the USD/CNY chart crossed above the demarcation line of 7. It would take more time than you need to spend, reader, to understand why 7 is an important line for this particular currency pair; what’s more, the why of it isn’t particularly important.
What is important is that it signalled that the Chinese government might be willing to cross over into demonstrable currency manipulation rather than back down to US trade demands. Global markets immediately started pulling back in to risk-off, protective positioning as this was seen as a signal that the US-China trade conflict, which some are already predicting may cost the global economy over $1 trillion, is unlikely to calm anytime soon and may well stretch past the end of next year.
Equities Markets
Carrying on from the state of markets on Friday, the world’s major equity indices have taken an absolute beating so far this week. The pain started with the open of Asian markets as the Yuan’s weak fix for the day signalled to markets that the US-China trade war is unlikely to find a resolution any time soon. As safe-haven pivots strengthened both gold and that Yen, equities in Europe and then the US continued to plummet amid increasing fears of unavoidable economic pain around the globe. On Monday, US markets had their worst day of the year with the Dow falling by more than 750 points (nearly 3 percent for the day.) Tuesday brought some signs of life as US equities rebounded, thanks in part to the small step back by the Chinese treasury, but so far that seems to have been a false dawn: despite some decent performance from overseas markets indicating another positive day, US stocks took another dive as soon as the bell rang this morning.
Downside Risks
It’s true, everything is looking up for the investor that’s long-gold right now. It’s important to remember though that gold in particular has some elastic pricing potential, and that it can really hurt when a rubber band snaps back. With these four primary drivers of gold’s rise to $1 500/oz over the last few days, it’s very possible that one could peter out or even reverse and still gold could continue higher. But, if just one of these factors were to go away and gold were to fall back below the $1485-1500 range, that could signal a strong collapse in the price of yellow metal from these highs, maybe as low as $1 450.
To be clear, I’m not calling for that to be the likely next move. The right thing to do — the smart thing to do — is to keep your eye on the four macroeconomic levels we’ve discussed here as they shift and learn from how gold price reacts.
Best of luck out there, traders. I’ll see you back here on Friday to breakdown how the week turns out. — goldprice.org
